The threshold for additional easing has risen substantially
BofA now projects Selic at 14.25% by end-2026, implying just one additional cut versus previous forecast of 13.25% decline. Rising inflation risks, fiscal stimulus-driven economic activity, and currency weakness create unfavorable macroeconomic backdrop for further monetary easing.
- BofA now projects Selic at 14.25% by end-2026, down from previous forecast of 13.25%
- Current Selic rate is 14.50%, implying only one more cut before a prolonged pause
- Dollar trading above R$ 5.15 on Friday amid U.S. employment data and risk aversion
- Central bank inflation target is 3%, with ceiling at 4.5%
Bank of America revised its 2026 Selic projection upward to 14.25%, expecting only one more rate cut followed by prolonged pause, citing deteriorating inflation dynamics and real depreciation.
Bank of America joined a growing chorus of major financial institutions this week in raising its forecast for Brazil's benchmark interest rate, signaling that the era of steady rate cuts is drawing to a close. The American bank now expects the Selic to settle at 14.25 percent by the end of 2026—a shift that means just one more reduction from the current 14.50 percent, followed by an extended holding pattern. Three months ago, BofA had projected the rate would fall all the way to 13.25 percent by year's end. The revision reflects a darkening view of the economic landscape.
David Beker, who leads BofA's economics team for Brazil and strategy across Latin America, framed the change bluntly: the macroeconomic backdrop has become "significantly less favorable." The culprits are familiar but stubborn. Inflation pressures are rising rather than falling. The real has weakened sharply, losing its role as a natural brake on imported price increases. And the economy continues to run hot, buoyed by ongoing fiscal stimulus and easy credit conditions that keep demand elevated and require higher interest rates to contain price growth. The central bank's inflation target sits at 3 percent, with a ceiling of 4.5 percent—a goal that forecasts are now drifting away from.
The currency has become the critical variable in BofA's thinking. The dollar climbed above 5.15 reais on Friday as U.S. employment data surprised to the upside, triggering a fresh wave of risk aversion that sent money fleeing emerging markets. In recent weeks, Beker had identified the exchange rate as the primary metric his team watches to calibrate its projections. A weaker real means imported goods cost more in local currency, feeding inflation through the supply chain—a transmission channel that had previously offered some relief.
Beyond the immediate pressures, BofA sees additional headwinds that have not yet been fully priced into forecasts. El Niño threatens next year's harvests, which could drive agricultural prices higher. The elimination of the six-day work week, a labor reform taking effect, carries its own inflationary implications. These factors, combined with the current trajectory, leave little room for the central bank to cut rates further. The threshold for additional easing has risen substantially, the bank concluded, consistent with a world of persistently elevated borrowing costs.
Beker suggested the central bank will likely signal this shift through a change in its communication—moving away from language that suggests more cuts are coming and toward language that emphasizes patience and caution. The monetary policy committee will probably pause, he indicated, as the barriers to further loosening grow higher and the case for holding rates steady for an extended period grows stronger. For borrowers and savers alike, the message is clear: the days of falling rates are behind us.
Citações Notáveis
The macroeconomic backdrop has become significantly less favorable, reflecting deteriorating inflation dynamics and currency weakness— David Beker, Bank of America's head of economics for Brazil
The central bank will probably signal a pause through a change in language as the barriers to further rate cuts rise— David Beker, Bank of America
A Conversa do Hearth Outra perspectiva sobre a história
Why did Bank of America suddenly become more pessimistic about rate cuts when other forecasters had already moved in that direction?
They were watching the same signals—inflation creeping up, the real weakening, fiscal stimulus keeping the economy hot—but they held out longer than XP and BTG. When the currency started collapsing this week, it became impossible to ignore. A weaker real means inflation imported directly into the economy, which is the opposite of what you need when you're trying to cut rates.
The bank mentions El Niño and the end of the six-day work week as risks not yet incorporated. Why would those matter for interest rates?
Agricultural shocks from El Niño would push food prices up, which is a big chunk of what Brazilians spend on. And when you change labor rules, you often get wage pressure or structural cost increases. Both of those feed inflation, which means the central bank has to keep rates higher to fight it. They're essentially saying: we haven't even seen the full picture yet.
What does it mean when a bank says the central bank will signal a pause through a "change of language"?
It means the committee won't necessarily announce a dramatic shift. Instead, they'll stop saying things like "we're on a cutting cycle" and start saying things like "we're data-dependent" or "we're pausing to assess." It's how you prepare markets for a long hold without admitting you were wrong about where rates were going.
Is there any scenario where BofA's forecast gets proven wrong?
Sure. If inflation actually starts falling faster than expected, or if the global risk environment stabilizes and the real strengthens again, they'd have room to cut more. But right now, those look like low-probability outcomes. The momentum is all in the other direction.